NCPA - National Center for Policy Analysis

Escalating Housing Values Kept Consumers Spending

May 23, 2002

American consumers have continued to spend at a lively clip, despite losses in the stock market over the past several years. The reason consumer sentiment and spending has remained high is that homeowners have experienced substantial gains in the value of their properties. Their continued spending, in turn, tamed what could have been a deep recession and turned it into a mild downturn.

  • House prices have risen 43 percent over five years -- including better than 8 percent last year.
  • In the past couple of years, American households lost $4 trillion in stocks, but that was cushioned by gains of $1.2 trillion in home equity.
  • Through refinancing, Americans last year pulled $90 billion in cash from their homes -- and took out tens of billions more through home-equity loans.

The question arises as to whether housing prices will prove to be a bubble in the same way stock run-ups turned out to be a bubble in the late 1990s.

Economists say housing prices in the future probably won't continue to rise as fast as they have been -- but present valuations do not constitute a speculative bubble. Even Federal Reserve Chairman Alan Greenspan has said it is "very difficult" to produce a bubble in the housing market -- and he doesn't foresee one forming.

Source: David Wessel, "Rest Easy, All Ye Homeowners," Wall Street Journal, May 23, 2000.


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